45 The strong performance of + 4% months (33/108, or over 30% of all months) for the founder-CEO index clearly contributes to the overall outperformance. 46 The wide dispersion of monthly returns corresponds with the higher standard deviation for the founder-CEO index (19.72%) compared to the VUG (17.31%). These sta- tistics are shown in Exhibit 4. 47 The VUG has 61 out of 108 months with a return distribution of + 4% to –2%, whereas the founder-CEO index has 49 out of 108 months with the same distribution. 48 The IR is measured as the excess returns of the port- folio (over a benchmark) divided by the tracking error (stan- dard deviation of the difference between returns). Investors prefer a high IR over a low ratio because high IR implies the investor is being well compensated for additional risk. The SR is similar to an IR, although in the former case the numerator of the ratio examines the excess returns of an asset’s returns over the risk-free rate of return and then divides this excess return by the asset’s standard deviation of returns. Conse- quently, the IR measures the risk-adjusted return in relation to a benchmark (such as the S&P 500 Index or the VUG), whereas the SR measures outperformance relative to a risk- free rate of return (e.g., U.S. Treasury bill). We also compute the excess returns on a relative basis to 301 U.S. large-cap growth funds. In this case, the founder-CEO ranks among the top nine percentile for excess returns and total returns, top 18 percentile for annualized alpha, top 16 percentile for IR, and top 39 percentile for the SR. 49 The scatterplot shows the founder-CEO index posi- tioned such that only a few investment options provide superior returns with the same or less risk. Moreover, given the risk component (as measured by standard deviation of returns), there appear to be many investment options with greater risk and lower historical returns. Notably, there are some investment options with greater returns and less risk. Although there is obviously no guarantee that historical patterns will continue, to the extent that the risk–return trade-off continues going forward, we can conclude that the founder-CEO index, at least in terms of this historical chart, appears to provide a compelling return given the risk level and alternative investment options. This presumption is consistent with charts in other sections of this article that show relatively high excess returns, risk-adjusted alpha, IR, and SR. 50 The up capture of 118.052% implies that when the S&P rises by 100%, the founder-CEO index rises by 118.05%. Moreover, when the S&P declines by 100%, the down capture implies that the founder-CEO index declines by 102.03%. The unequal nature of the increases versus the decreases favors a positive bias to the founder-CEO index. Moreover, as the next endnote describes, the larger number of positive periods, relative to negative periods, provides a net benefit to the founder-CEO strategy. Presumably, if the
the world. The database aggregates returns and provides ana- lytic capabilities for computing traditional investment criteria, such alpha, beta, information ratio (IR), tracking error, and so on. The graphs, statistics, and benchmark data have all been computed and/or supplied by eVestment. 40 The number of comparison funds for the three-year period is 3,559 (top two percentile), and the number of comparison funds for the one-year period is 3,819 (top five percentile). Moreover, when compared within an eVestment database universe of 351 U.S. large-cap growth equity funds, the founder-CEO index still ranks among the top one per- centile for the five-year time period. Among U.S. large-cap equity growth funds, percentile ranking drops to two per- centile for the three-year period and 28th percentile for the one-year period (that ref lects 2015 alone). 41 The number of funds in the all U.S. equity universe ranges from 3,799 (2015) to 4,409 (2008). 42 The founder-CEO index ranked in the top fifth per- centile among all U.S. equity funds in 2015 and 2013 and top 10 percentile in 2009 and 2011. We note that against an eVestment universe of 400 + U.S. large-cap growth funds, the founder-CEO index ranks in the top 10 percentile for four of the nine years shown, but it also falls in the bottom half of the percentile rankings for four out of the nine years. The numbers for the eVestment database vary from year to year based on the number of constituent funds in existence with reported performance records. 43 We note that corresponding with this time period, July 2005 through December 2016, EntrepreneurShares, LLC applied a founder-CEO model (along with some other variables) and compiled a performance track record for U.S. large cap separately managed accounts that was ranked at the top by Pension and Investment for an extended 10-year track record, dated February 22, 2016. Moreover, EntrepreneurShares U.S. large-cap growth applies a similar model of founder CEOs (along with a few other variables) and on January 7, 2017 was ranked seventh by The Wall Street Journal (Category Kings) for 2016 performance among 700 comparable U.S. large-cap growth strategies. In more recent periods, the EntrepreneurShares performance (which includes founder CEO along with other variables) significantly out- performs the founder-CEO index model alone, suggesting that although the founder-CEO variable provides very compelling information over an extended period of time, it may be enhanced in certain market conditions with other management- or entrepreneur-related data. 44 In other words, the founder-CEO index provides a monthly return of 6% or more in 19 out of 108 months, or approximately 17.6% of all months. The VUG U.S. large-cap benchmark, in contrast, provides a monthly return of 6% or more in 11 out of 108 months, or approximately 10.1% of the time.
W INTER 2017
T HE J OURNAL OF I NDEX I NVESTING
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